More cross-border yuan transactions

Bloomberg reports that the Chinese yuan is increasingly displacing the U.S. dollar as the medium of exchange across Asian borders. Why shouldn't it?

China expanded yuan settlement agreements last week from border zones to its largest financial centers, including Shanghai, Guangzhou and Hong Kong. The program is being rolled out across Malaysia, Indonesia, Brazil and Russia, all nations seeking to reduce the dollar’s role as the linchpin of world finance and trade.

The central bank first brought up the concept of a supranational currency to replace the greenback in reserves in March. It will sponsor use of the yuan in trade by arranging export tax rebates. Russia and India said the global financial crisis had highlighted the dollar’s flaws and called for a debate before the Group of Eight leaders meet in L’Aquila, Italy, starting today.

“It does give you an idea of what the future could look like,” said Ben Simpfendorfer, chief China economist in Hong Kong at Royal Bank of Scotland Group Plc, the fifth-biggest foreign-exchange trader. “The Chinese see an opportunity at this point to raise questions about the dollar and its status as a reserve currency.”

On its face, it makes little sense that Chinese buyers of, say, iron-ore from Brazil or oil from Russia would have to convert their yuan into U.S. dollars, then give them to their trading partners who would then convert them back into reals and rubles.